Goldman: Buy Oil, Sell Stocks; We’ll Be Right No Matter What

David Kostin from Goldman Ballsachs is warning clients to get the fuck out of stocks this morning, pouring cold milk over everyone’s heads.

He thinks the market is complacent and without decorum. Moreover, he likes downside puts protection here, as the options market is living in a fantasy world of bullish fervor.

“A drawdown during the next few months could find the S&P 500 index falling by 5-10 percent to a level between 1,850 and 1,950,” they write in their latest research.

High valuations
Price to earnings ratios—a popular measure for whether a stock is expensive relative to history and to its peers—remain stubbornly high. To illustrate this “extended valuation,” Kostin and his team point out that the forward P/E multiple of the S&P 500 is now in the 86th percentile, when looking back over the past 40 years. The median stock in the index trades in the 99th percentile of historical valuations, the bank adds.

Supply and demand
Investors weren’t very quick to buy U.S. stocks during the first few volatile months of 2016. “Even as the S&P 500 index rebounded from its Feb. 11 low, institutional and hedge fund U.S. equity futures positions remained net short,” Goldman writes. That has changed quite drastically. “Sentiment has shifted sharply during the past few weeks. Since the end of March, investors have bought $23 billion worth of futures positions, lifting our Sentiment Indicator to 32, a less bullish level compared with mid-winter.”

No one knows what the Fed will do
There isn’t much consensus as to when the Federal Reserve will raise benchmark U.S. interest rates again. While Goldman economists expect two hikes this year, the wider market is pricing in even chances of one or fewer rate increases. The mismatch means “more likelihood exists for an incremental hawkish surprise than a dovish surprise,” the equity analysts write.

It’s an election year
An unconventional political season means that Goldman’s clients are paying even more attention to electoral campaigns. “The U.S. presidential election is now part of every client conversation,” Kostin and team note. Even without the added surprises, the S&P doesn’t usually do well during the summer of election years. “History shows that during a typical presidential election year, the S&P 500 index remains relatively range-bound until November,” Goldman says.

In a separate note, another Goldman analyst said oil has bottomed, thanks to the wonderful strife in Nigeria, the Canadian fires, and a sundry of events which has led oil production supply to fall to levels that make a rally in crude plausible. Naturally, these are transient events and utter horseshit, especially when taking into account what these large and small oil companies are reporting in their earnings: record production levels are still being achieved.

Nevertheless, it’s important that Goldman curry favor to both the bull and bear crowd, in order to look right no matter the outcome.